Community Trust Bancorp, Inc. — 1Q 2013 Form 10-Q Summary
Business context and reporting period
Community Trust Bancorp, Inc. (CTBI) is a Kentucky-based bank holding company operating a commercial bank and trust company through 81 banking locations in Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited three months ended March 31, 2013, with comparisons to the three months ended March 31, 2012 and December 31, 2012 balance-sheet data.
CTBI reported $3.7 billion of assets, $3.1 billion of deposits plus repurchase agreements, and $406.6 million of shareholders’ equity at March 31, 2013.
Key financial metrics
| Metric | 1Q 2013 | 1Q 2012 | Change |
|---|---|---|---|
| Net interest income | $33.2 million | $33.0 million | +0.6% |
| Provision for loan losses | $1.6 million | $1.2 million | +$0.4 million |
| Noninterest income | $11.9 million | $11.2 million | +6.6% |
| Noninterest expense | $26.3 million | $25.8 million | +2.1% |
| Net income | $11.8 million | $11.9 million | -0.4% |
| Basic and diluted EPS | $0.76 | $0.77 | -$0.01 |
| Dividends declared per share | $0.315 | $0.310 | +$0.005 |
| Net interest margin | 4.02% | 4.05% | -3 basis points |
Average earning assets increased 2.2% to $3.394 billion, while the yield on average earning assets declined 31 basis points to 4.45%. The cost of interest-bearing funds declined 34 basis points to 0.56%.
- Loans totaled $2.563 billion, up 0.5% from year-end 2012 and $21.1 million from March 31, 2012.
- The allowance for loan losses was $33.4 million, or 1.30% of total loans. Net charge-offs were $1.4 million, or 0.22% of average loans on an annualized basis.
- Nonperforming loans were $33.9 million, and nonperforming assets were approximately $79.0 million. Reserve coverage of nonperforming loans was 98.6%.
- Other real estate owned totaled $45.7 million, including $45.2 million of foreclosed properties.
- Cash and cash equivalents were $167.9 million. Available-for-sale securities were $677.5 million and represented the principal additional source of liquidity.
- Total deposits were $2.934 billion; repurchase agreements were $213.6 million. Long-term debt was $61.3 million, and total liabilities were $3.265 billion.
- Net cash provided by operating activities was $31.9 million. Investing activities used $103.6 million, primarily for purchases of available-for-sale securities. Financing activities provided $32.1 million, resulting in a $39.6 million decrease in cash and cash equivalents during the quarter.
- Regulatory capital ratios were 10.86% Tier 1 leverage, 15.33% Tier 1 risk-based, and 16.58% total risk-based, exceeding the stated “well-capitalized” thresholds.
Material changes versus comparable periods
- Net income declined modestly year over year despite higher net interest income and noninterest income, primarily because the provision for loan losses and noninterest expense increased.
- Noninterest income benefited from higher gains on loan sales and trust revenue. Gains on loan sales increased to $1.4 million, including a $0.5 million gain on one commercial loan.
- Other real estate owned expense increased by approximately $1.0 million year over year. CTBI recorded $1.1 million of fair-value write-downs on other real estate owned during the quarter.
- Nonperforming loans decreased $0.7 million from March 31, 2012 and $2.1 million from December 31, 2012. Nonperforming assets declined $14.2 million year over year and $4.0 million from year-end.
- Impaired loans increased to $66.5 million from $60.0 million at March 31, 2012 and $62.5 million at December 31, 2012.
- The investment portfolio increased $74.2 million during the quarter and $63.5 million year over year, while deposits plus repurchase agreements increased $33.2 million during the quarter but declined $25.7 million year over year.
- Accumulated other comprehensive income declined to $11.0 million from $12.7 million at year-end, reflecting a $1.7 million after-tax unrealized loss on available-for-sale securities during the quarter.
Guidance, outlook, risks and unusual items
CTBI did not provide quantitative earnings guidance. Management stated that economic conditions in its markets had improved but expected a challenging environment throughout 2013. Management anticipated that foreclosed properties would remain elevated while current market conditions were addressed.
- Key risks include local economic conditions in eastern and central Kentucky, southern West Virginia, and northeastern Tennessee; unemployment; collateral values; borrower credit performance; interest-rate movements; competition; regulatory changes; technology dependence; acquisitions; and legal matters.
- Interest-rate sensitivity modeling indicated that a 200-basis-point increase in the yield curve would increase estimated net interest income by 0.38% over one year but decrease it by 2.11% over two years. A 25-basis-point decrease would reduce estimated net interest income by 0.10% over one year and 0.33% over two years.
- CTBI reported approximately $336.7 million of available Federal Home Loan Bank borrowing capacity and $44 million of correspondent-bank lines of credit at March 31, 2013.
- Management assessed all investment-portfolio impairment as temporary, market-driven, and not credit-related. Securities with unrealized losses represented 22.2% of total investments, compared with 14.8% at year-end.
- Seventeen loans totaling $8.3 million were modified in troubled debt restructurings during the quarter, with no resulting net charge-offs. Five previously restructured loans totaling $1.0 million subsequently defaulted.
- Basel III implementation could increase capital requirements, compliance costs, and pressure on lending, profitability, dividends, or shareholder dilution; management believed CTBI’s capital position would enable compliance with the proposed rules.
- The board declared a $0.315 per-share dividend payable July 1, 2013. No shares had been repurchased since February 2008, although 288,519 shares remained authorized for repurchase.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing reported no legal proceedings or separately identified risk-factor changes.
Most important facts for investors to verify
- Whether the improvement in nonperforming loans and nonperforming assets continues, particularly in the Central Kentucky region.
- Whether impaired loans, troubled debt restructurings, foreclosed property balances, and related write-downs require additional provisions or capital.
- Whether the 4.02% net interest margin remains stable as asset yields, deposit costs, and interest rates change.
- Whether loan growth and investment purchases can be funded without materially reducing liquidity or increasing higher-cost borrowings.
- Whether unrealized securities losses remain temporary and non-credit-related, especially given the increase in securities with unrealized losses.
- Whether gains on loan sales, trust revenue, and other noninterest income are recurring or dependent on unusual transactions.
- The final impact of Basel III and other regulatory changes on capital ratios, dividends, lending capacity, and operating costs.
- The filing is unaudited interim information; full-year results may differ materially from the first-quarter results.